The False Promise of Drug-Price Controls

Fixing the prices of prescription drugs creates shortages and stifles research into new drugs.

Are the laws of economics negotiable? Some foreign leaders seem to think so. They’re installing price controls in the hope of bringing down prescription-drug costs. They’re convinced they can simply decree that drug companies charge less without any consequences on public health.

They’re wrong. Drug-price controls might conceivably result in small, short-term savings, but ultimately they hurt patients by restricting access to medicines and preventing the creation of new, breakthrough treatments.

Consider the Indian healthcare system and its long history of failed price-control policies. Its National Pharmaceutical Price Authority sets hard price caps on a wide variety of Western-sourced drugs and then steadily ratchets the caps down.

Since early 2016, the authority has slashed the price of some popular diabetes drugs by 42 percent and some cancer drugs by a whopping 86 percent. Earlier this year, it cut by up to 50 percent the prices for another 33 “essential” medicines, including treatments for the common cold, arthritis, and the skin condition psoriasis.

South Korea’s price caps work in a similar way. The country’s sole public insurance program sets a maximum price for all drugs sold to its beneficiaries and then aggressively negotiates down from there. This process is notoriously opaque, with drug companies usually provided little justification for pricing decisions. And it’s drawn out, typically taking between 12 to 18 months for a submitted drug to finally get priced. During that time, sick patients can’t access new breakthroughs.

And South Korea’s price dictates haven’t stuck to only brand names. Generics are also under tight control. Initially they can’t be sold for over 60 percent of the price of their brand-name counterpart, and that ceiling falls to roughly 53 percent after a year.

Foreign countries also control drug costs in more subtle ways. For example, there’s the practice of “reference pricing,” in which officials group drugs into classes according to their therapeutic effects and then set a single price for all drugs in a given class. Under this system, a breakthrough, brand-name blood-pressure drug could be priced the same as a decade-old generic in the same class.

Sometimes officials group drugs into classes according to their therapeutic effects and set a single price for all drugs in a given class. Under this system, a breakthrough, brand-name blood-pressure drug could be priced the same as a decade-old generic.

Reference pricing is particularly popular in Europe. Germany, Spain, and Italy have adopted the practice and now dictate drug prices that can be up to 24 percent below prevailing market rates.

Less-developed countries have resorted to abusing the “compulsory licenses” provision established by international law, which allows governments to break patent protections on foreign drugs and produce generic versions locally. These licenses are supposed to be used only in the event of a genuine public-health emergency; a poor country suffering, say, an Ebola outbreak may not have the time or resources to import foreign medicines.

But countries have started strong-arming compulsory licenses in non-emergency situations simply to secure deep discounts on popular drugs. Most recently, the lower chamber of the Chilean congress passed a bill demanding licenses for drugs used in treating hepatitis and cancer — serious diseases, for sure, but neither represents a health emergency in Chile.

One might ask: What’s the harm? If foreign countries can regulate down drug prices and make medicines more affordable, why shouldn’t they?

There’s no free lunch. That’s the lesson of the long, ignoble history of price controls. The laws of economics cannot be changed through regulatory or legislative fiat. If government officials make something artificially cheap, they’ll eventually have less of it. Demand will outstrip supply. That goes for milk, oil, and medicines.

Pharmaceutical prices reflect massive development expenses. Creating just one new drug is an extremely expensive, time-consuming process, usually costing several billion dollars and taking at least a decade. And the failure rate is sky-high: Drug scientists test thousands of promising compounds for every one that’s turned into a marketable product.

Companies are willing to make such a risky investment because a breakthrough product can generate a huge payoff. But price controls squeeze that payoff. They prevent drug firms from charging prices commensurate with those massive development costs. For some companies, the payoff is no longer worth the risk, and they’re forced to scale back on new research. The U.S. Department of Commerce calculates that price controls among countries in the OECD, a major economic organization comprising much of Europe, drives away $5 billion to $8 billion in potential pharmaceutical development investment every year. That prevents the creation of three to four new drugs annually.

This loss of development dollars doesn’t just hurt citizens in controlled markets; it deprives all of us of new, life-saving treatments. This is the terrible toll of drug-price controls. Foreign authorities need to wake up to the harm they’re causing.

— Peter J. Pitts, a former FDA associate commissioner, is president of the Center for Medicine in the Public Interest.